Fuel-trading and hedging strategies are longstanding and familiar tools used by airlines to control costs. But they can be costly to execute, especially when prices are rising rapidly. Moreover, these strategies do not help airlines achieve their sustainability targets.
Airlines need new tools to control fuel costs. After labor, fuel is their largest operating expense, accounting for more than 20% of costs. Fuel prices have more than doubled in the past year, straining the profitability of a low-margin industry. But airlines can look beyond financial engineering and into the cockpits and cabins of their planes to find “behavioral hedges,” ways to lower costs through simple, inexpensive interventions—or “nudges”—that encourage better habits and decision making on the part of employees and passengers alike. Behavioral hedges can complement existing fuel hedges.
The airline industry is already onboard with nudges. For instance, Copenhagen Airport redesigned its signage to board passengers faster and more efficiently. In another experiment, Virgin Atlantic monitored pilots’ fuel usage before takeoff, in the air, and on the ground after landing. The airline estimates that during the study, which covered eight months and 40,000 flights, pilots cut fuel costs by $5.4 million and reduced carbon dioxide emissions by more than 21,500 metric tons.Greer K. Gosnell, John A. List, and Robert Metcalfe, “A New Approach to an Age-Old Problem: Solving Externalities by Incenting Workers Directly,” National Bureau of Economic Research, June 2016.